Financial Research Institute: "Domestic Financial Companies' Exposure to High-Risk Overseas Real Estate Risks Up to 46 Trillion Won"

"Concerns Over Significant Increase in Loss Risks Amid Prolonged COVID-19 Pandemic"

[Asia Economy Reporter Kangwook Cho] The high-risk overseas real estate exposure of domestic financial companies, including securities firms, insurance companies, and asset management companies, is estimated to reach up to 46 trillion won.

On the 8th, according to the Korea Institute of Finance, Senior Research Fellow Haesik Park revealed in the report titled "High-Risk Overseas Real Estate Exposure and Risks of Domestic Financial Companies" that the high-risk overseas real estate exposure of domestic financial companies was approximately 42 trillion to 46 trillion won. Exposure refers to the potential loss amount that can occur in all transactions.

According to the report, overseas real estate investments by domestic financial companies have rapidly increased since 2016, mainly among non-bank financial companies such as securities firms, insurance companies, and asset management companies. According to a report by Korea Credit Rating cited by the Korea Institute of Finance, the proportion of commercial real estate such as hotels and resorts among overseas real estate investments by major domestic securities and insurance companies exceeds 80%.

Asset management companies mainly raise funds in the form of private equity funds to invest in overseas real estate, while securities firms acquire overseas real estate and either sell it to insurance companies, pension funds, etc., or hold it until maturity. It is understood that overseas real estate investments by domestic financial companies are mainly concentrated in commercial real estate such as office buildings, hotels, resorts, and logistics centers in advanced countries like the United States and Europe.

Research Fellow Park estimated the overseas real estate exposure of domestic financial companies based on the overseas real estate exposure of 18 major domestic securities and insurance companies and the proportion of risk grade 1 in public overseas real estate funds of asset management companies. As a result, securities and insurance companies were calculated to have 11.3 trillion to 16 trillion won, and asset management companies 30.4 trillion won.

Park said, "Since overseas real estate investments by domestic financial companies have been concentrated since 2016, when real estate prices in the United States and Europe had already risen significantly, the risk of loss is relatively high," adding, "Most of their investments do not have direct debtor-creditor relationships with the real estate ownership entities, so if a default occurs, exercising rights may be difficult."

He also added, "Most of the overseas exposure consists of equity investments or mezzanine loans with lower repayment priority, reducing the possibility of recovering investment funds in emergencies," and "Especially as investments are concentrated in commercial real estate vulnerable to COVID-19, the risk of loss may increase if the COVID-19 situation prolongs."

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